Planning Discussions - 2015 - IRA Rollover Changes

Wealth & Pension Services Group
Jane Nowak, CFP^® CDFA^™
02/05/15

January 2015 - IRA Rollover Changes Effective Now

When the calendar flipped over to 2015 we were greeted with tax law changes for IRA rollovers. Although many of us won’t be affected by these rule changes, ‘I didn’t know’ is not an excuse when it comes to violating the IRS regulations.

IRA (SEP and SIMPLE IRA owners too) need to know the changes made to IRAs and the ability to receive a check when rolling over your IRA money from one account to another (or back into the same IRA account).

Defining Terms

Direct Transfer also known as a Trustee to Trustee transfer is when your money and your investments go directly from one IRA account into another IRA account. You do not receive a check that needs to be re-deposited into another IRA account.

Indirect Transfer is when your IRA money is sent to you in the form of a check which must be re-deposited into another IRA account within 60 days. –If the money is not re-deposited before the 60 day window closes, the full amount received becomes fully taxable to you as an IRA withdrawal. Too, this money may not be re-deposited into an IRA account.

Rolling Calendar Year is marked from the month, date and year that you make the transaction not the calendar year. So, you can’t take an annual indirect transfer on December 31st 2015 and become eligible January 1st 2016 for another indirect transfer. You must wait a full 365 days before taking your one permissible indirect transfer per 12 month period.

What You Need to Know

One indirect distribution per 365 days across all IRA (SEPs and SIMPLEs too) accounts.

Effective January 1st 2015, you may only make one indirect IRA transfer every 365 days. That is one indirect IRA transfer (You receive a check.) across all IRA accounts per 365 days. So, if you have multiple IRA accounts you may only take a check from one of the accounts every 365 days before you run afoul of this new law. –Can you say, pay an unexpected tax bill?

Trustee to Trustee/Direct Transfers are not limited.

Tax Implications of Violating this Rule

When you violate this rule the indirect IRA distribution, the distribution that you took, immediately becomes taxable as an IRA withdrawal and must be included in gross income for the year. -Yes, that means taxes, penalties and no more tax free growth.

Too, this money may not be re-deposited into any IRA. If you do, the money may be:

§ Treated as an excessive contribution

§ Taxable at an additional 6% per year as long as it stays in the IRA account

If you have taken an indirect transfer (received a check from your IRA before re-depositing it into another IRA) within the last 365 days and you are moving IRA monies to a new account or under the management of a new advisor, to avoid the pitfalls of this rule, before making any transfers, you absolutely must let your financial advisor know that you have taken an indirect transfer and the date of the transfer.

What You Need to Do to Avoid Rollover Problems

Unless you intend to make a taxable IRA withdrawal, when moving money from one IRA account to another, you should always make a Direct transfer/Trustee to Trustee transfer of your IRA monies. And if you make an indirect transfer, keep track of the month, date and year of the transfer.

Talk to your financial advisor before doing any type of IRA, SEP or SIMPLE rollover.

So Why Did the IRS Make This Change?

Some IRA owners were using their IRA accounts to make tax free loans to themselves. Often, they would have multiple IRA accounts from which they would take 60 day tax free loans all year long.

The intention of the IRA is to save tax deferred for retirement not for providing oneself with tax free loans to fund other business opportunities. So, the laws were changed to close this loophole.

Just the Facts Ma’am, Just the Facts

For more specific information and reference, here’s a great place to start: http://www.irs.gov/Retirement- Plans/IRA-One-Rollover-Per-Year-Rule